Tax pointers for an overseas buyer when purchasing a UK company from UK sellers

Assets or shares?

While most buyers would prefer to cherry pick the choicest assets a company has to offer, sellers will typically want to sell their company as a whole. A company sale allows the seller to get the sale proceeds into their hands more tax efficiently. The difference is significant enough for many sellers to change their price or pull out of a deal if a buyer insists on purchasing the company’s assets, as opposed to purchasing the company’s shares. 

Broadly, a corporate seller can often sell a trading company free of any tax, while an individual can often sell a company subject to 10% or 20% capital gains tax (CGT). Asset sales typically lead to a round of tax within the target company, often at a 25% rate. A company shareholder may then be able to extract the cash free of further tax, while an individual shareholder would incur further income tax or CGT. 

Deferred consideration

Sometimes not all the consideration for a purchase is paid at completion. One possibility is for part of the proceeds to be payable over time. A buyer might want to place restrictions or conditions on future payments. As CGT on share sales is much lower than income taxes on employment income, HM Revenue & Customs (HMRC) is careful to ensure any deferred consideration is not disguised employment income. For example, the earn-out must not be conditional on future employment beyond a reasonable requirement to stay to protect the value of the business being sold. (More HMRC thoughts on this can be read in HMRC’s online manuals at ERSM110940).

Structuring

Sometimes it’s possible to restructure a sale to improve the efficiency for the seller or the buyer. For example, instead of buying real estate, a buyer might purchase the company which holds that real estate, replacing stamp duty land tax (SDLT) at rates up to 17%, with stamp duty at a 0.5% rate of tax. In this example, the buyer must be alert to the fact it will inherit the seller’s base cost in the property. However, this typically means the buyer acquires a “pregnant” or “latent” gain – meaning the buyer might pay more corporate tax when the company eventually sells the property. There may be a benefit to aggregating buyer and seller tax to find the most efficient overall solution, balancing advantages and disadvantages, and sharing benefits between buyer and seller.

From a seller’s point of view, if the buyer only wants to acquire certain assets of a company, an asset sale (which is typically tax inefficient for a seller) could perhaps be replaced with a “hive down” of the desired assets into a new subsidiary company, followed by a purchase of that subsidiary company. A seller can sometimes obtain tax relief on this sort of sale, reducing their overall tax. However, there are several conditions to this kind of arrangement.

Matt Spencer is a partner within the corporate, commercial and finance team, specialising in tax law, advising on and efficiently structuring a wide range of corporate and real estate transactions including M&A, land transfers, developments, and leases.